ECON 101 CH1

What are 2 questions to ask yourself for calculating opportunity costs

1. What happens if you pursue your choice? 2. What happens under your next best alternative

What is the marginal cost and marginal benefit to hiring a new employee

- benefit: the extra work employee will bring - cost: cost of paying the new worker

What is the best way to quantify costs and benefits when it comes to cost benefit principle

- convert cost and benefit into its money value to find willingness to pay

What are sunk costs:

- cost incurred and can't be reversed - sunk cost exists in whatever choice you make so it's not an opportunity cost - good decisions ignore sunk costs

You make a macramé wall hanging for $30 and sell it to a customer for $50. What is your economic surplus associated with the transaction?

$20

Matthew has been diagnosed with cancer and doctors estimate that he has roughly 5 months to live. From an economic standpoint, which BEST explains why Matthew might be more likely than a healthy person to take a risky experimental drug?

His opportunity cost is lower than that of healthy people.

total benefits more than total costs.

If a decision boosts a person's economic surplus, then it must be true that the decision boosted:

opportunity cost

The _____ principle says that the true cost of something is the next best alternative that you must give up to get it.

rise; rise

There are far fewer stay-at-home moms today than in 1975 in large part because women's wages have _____, causing the opportunity cost of being a stay-at-home mom to _____.

choices

Which of these would best be described as the foundation of all economic forces?

marginal cost and marginal benefit

Which two values should a business owner compare before deciding to hire one more worker?

You are weighing the cost of a cup of coffee against the satisfaction you will obtain from the coffee. Which economic principle are you taking into account?

cost-benefit principle

Natasha starts a small software company but finds it difficult to hire good software developers since she has a very large competitor half a mile away. This is BEST explained by which of these interdependencies?

dependencies between people or businesses

If buyers and sellers always follow the cost-benefit principle, it ensures that all transactions will yield:

economic surplus.

What is a good trick for opportunity cost principle?

- "or what" - "should I get an MBA" "Or keep working"

What is a common way to find the big idea behind the interdependence principle:

- "what else" - what else might affect my decision

Adina is trying to decide how many workers she should hire at her new theater. The table below shows Adina's weekly costs and benefits based on the number of staff she hires. How many workers should she hire?

- 5

what is willingness to pay?

- Max amount buyer would be willing to pay for something

Common phrased attached to each principle:

- One more? (marginal) - Does the benefit beat the cost (cost-benefit - Or what? (opportunity cost) - What else (interdependence)

What are the 4 economic principles:

- The cost benefit principle - The opportunity cost principle - The marginal principle - The interdependence principle

The opportunity cost principle says:

- The true cost of something is the next best alternative you have to give up to get it

The cost benefit principle says:

- are the incentives that shape decisions - only pursue choices whose benefits are at least as large as their costs

The marginal principle says:

- decisions about quantities are best made incrementally. - break down large decision into series of smaller (or marginal) decisions - then weigh the benefits and costs

Charlotte is studying for a psychology exam and an economics exam that are both scheduled for Monday. She would like to study three hours for each exam, but she only has five hours to study, so she must decide whether one exam grade is more important to her than the other. This exemplifies which of these types of dependency?

- dependencies between your own choices

What is the rational rule:

- if something is worth doing, keep doing it until your marginal benefits equal your marginal costs

How does scarcity apply to the opportunity cost principle

- resources are limited, therefore any resource you spend pursuing one activity leaves fewer resources to pursue others. Scarcity implies that you always face a trade off

What is the production possibility frontier:

- shows the different sets of output that are attainable with your scarce resources - greater productivity pushes out your frontier

Amancio is going into his fourth year of school when he is offered a prestigious position at a software company. Instead of applying the opportunity cost principle to see if he should quit school and take the job, he decides to stay in school, because he has already spent so much time and money on furthering his education. Amancio's hasty decision has been negatively affected by:

- sunk costs.

You have decided that you will buy tacos, but you are still trying to decide how many tacos you should buy. Which economic principle are you taking into account?

- the marginal principle

You are thinking about quitting your job to go back to school. Which of these is not associated with an opportunity cost?

- time spent

What is the framing effect (cost benefit principle)

- when a decision is affected by how a choice is described, or framed - Should avoid framing effects altering your own decisions

You are willing to pay $4 for a cheeseburger. According to the cost-benefit principle, when should you buy a cheeseburger?

- when the cost is less than or equal to $4

The interdependence principle says:

- your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future - when any of these change then your best choice might change

Money

------- is a common measuring stick that allows different people to compare a wide variety of costs and benefits, taking into account both financial and nonfinancial aspects of a decision.

What are the 4 types of interdependencies you need to think about:

1. Dependencies between each of your individual choices 2. Dependencies between people or business in the same market 3. Dependencies between markets 4. Dependencies through time

What are 4 important lessons about opportunity costs

1. some out-of-pocket costs are opportunity costs (pay tuition) 2. opportunity costs need not involve out-of-pocket financial costs (lose salary from quitting job to go to college) 3. Not all out-of-pocket costs are real opportunity costs (have to pay room and board whether go to college or not) 4. Some non financial costs are not opportunity costs (you spend 10 hours studying and doing school but she already spent that time working so it's not an opportunity cost)